2023 results fall short of our expectations
The company announced 2023 results: revenue of 20.0 billion yuan, +145% year-on-year; net profit to mother of 750 million yuan (net profit of 4.15 billion yuan in 2022), reversing year-on-year losses. 4Q23 revenue was 4.22 billion yuan, +145% year-on-year, with a net loss of 380 million yuan (4Q22 net loss of 1.18 billion yuan), lower than our expectations. The main reason was that exchange rate depreciation and rising oil prices dragged down the company's performance.
The decline in passenger occupancy rates has narrowed, and passenger kilometer earnings have surpassed pre-pandemic levels. The company's passenger occupancy rate in 2023 was 82.8%, narrower to 2.4ppt compared to 2019. Passenger kilometer revenue was +5.8% compared to 2019, and seat kilometer revenue was +2.8% compared to 2019. High oil prices and depreciation of the exchange rate are dragging down the company's performance. The company's fuel cost per unit in 2023 was +24% compared to 2019, and the company confirmed a net exchange loss of 135 million yuan in 2023.
Development trends
With flexible revenue policies and improved cost control, the company's profitability can be expected. The company's commercial and leisure travel routes have developed in two rounds, taking into account ticket prices and passenger seat levels. Single-seat revenue in the first year of travel recovery exceeded pre-epidemic levels. The 4Q23 company's overall passenger occupancy rate reached 83.0%, and the off-season passenger seat level was only 0.1 ppt lower than before the pandemic. We believe this shows that the company's route operations are both highly profitable and flexible in capacity allocation. In addition, the company has strengthened cost control. When aircraft utilization has not yet returned to pre-epidemic levels (10.67/10.34 hours in 2019/2023, respectively), unit non-fuel costs have decreased by 7.5% compared to 2019. We expect that under the pressure of rising oil prices, the company's profitability in 2024 is still expected to exceed pre-epidemic levels.
The resumption of delivery of 737Max strengthens the company's growth, and international flights are expected to enter a period of growth. In January 2024, China Civil Aviation resumed receiving 737Max aircraft. Jiuyuan Airlines, a wholly-owned subsidiary of the company, plans to introduce 4 aircraft throughout the year, which will further boost the company's fleet growth. Since 2023, the company has opened new European routes from Shanghai to Manchester, Greece, Brussels, etc., and the Helsinki route, which was opened before the pandemic, has gradually entered a mature period. The company's European routes have entered a period of large-scale operation and international capacity investment. We believe this will increase the company's utilization rate and profit level of wide-body aircraft.
Pay attention to financial cost improvements and progress in sending Pratt & Whitney engines for repair. Operating lease statements and interest-bearing liabilities increased during the pandemic, and the pressure on the company's financial expenses increased. The company incurred interest expenses of 1.39 billion yuan in 2023 (380 million yuan in 2019), which dragged down the company's profits. In addition, returning Pratt & Whitney engines to the factory for repair will affect the company's capacity investment, but considering that the company sent repairs earlier, we expect that the impact on the company's operations in 2024 will be manageable, and the 2024 results may be better than market expectations.
Profit forecasting and valuation
Considering that the rise in oil prices exceeded expectations, we lowered the company's 2024/2025 profit forecast by 16.7%/17.5% to 21.10/2.80 billion yuan. The current stock price corresponds to the 2024/2025 price-earnings ratio of 12.5/9.4 times, and the target price was lowered by 21.4% to 16.9 yuan, corresponding to 17.8 times the price-earnings ratio in 2024, corresponding to 42.6% upward space. Maintain outperforming industry ratings.
risks
Oil prices have risen sharply, the RMB has depreciated sharply, and engine failures have led to large-scale grounding of aircraft fleets.